Bulgaria adopts key amendments to Financial Collateral Act, introduces close-out netting regime

On 31 July 2025, the Bulgarian National Assembly passed significant amendments to the Bulgarian Financial Collateral Act (FCA), marking a pivotal step in aligning the country’s financial legislation with international best practices and enhancing the stability of its financial markets. The centerpiece of the amendments is the adoption of a comprehensive legal framework for close-out netting, an essential mechanism for effective credit risk management in modern financial markets.

Until now, the lack of a clear legal regime for close-out netting in Bulgaria created significant uncertainty, especially in insolvency proceedings. For years, insolvency restrictions and legislative shortcomings created uncertainty regarding pre-agreed netting mechanisms, deterring foreign counterparties from entering into transactions with Bulgarian entities and limiting the ability of local financial institutions to manage their credit exposures effectively. With this reform, Bulgaria overcomes a significant competitive disadvantage, since it was the last EU member state without a general legal framework for close-out netting.  

Close-out netting in a nutshell

Close-out netting allows parties engaged in multiple financial transactions (e.g. derivatives, repo agreements, and securities lending) to consolidate their obligations into a single net amount in the event of default or insolvency. This mechanism is triggered by a pre-agreed “enforcement event,” enabling the non-defaulting party to terminate all outstanding transactions and calculate a net balance, significantly reducing credit exposure.

The new legal framework ensures that close-out netting agreements are enforceable even in insolvency or resolution scenarios, providing protection for the non-defaulting party. The amendments also synchronise the rules for financial collateral with those governing close-out netting, reflecting the reality that these mechanisms are often used together in practice.

Broader legislative synchronisation

In addition to the core changes to the Financial Collateral Act, the amendments include updates to the Bulgarian Bank Insolvency Act and the Bulgarian Commercial Act, ensuring that the new netting regime is fully integrated and protected against conflicting insolvency rules.

FCA reforms also include clarifying the scope of financial instruments covered and financial counterparties that can enter into financial collateral arrangements (given that the terminology currently in use is 15 years old) and expanding the list of eligible counterparties to third country-counterparties. The amended law now allows entities established in non-EU jurisdictions to participate in such agreements with Bulgarian market participants. This is a marked shift from the previous regime, which was more restrictive and limited the pool of eligible foreign counterparties.

With these amendments, Bulgaria removes a significant legal barrier, paving the way for deeper integration with global financial markets and fostering a resilient and attractive environment for investments and effective risk management of local counterparties.

For more information on how Bulgaria’s comprehensive close-out netting legal framework could impact your business, contact your CMS client partner or these CMS experts: Elitsa Ivanova, Partner and Konstantin Stoyanov, Counsel.